Limited Liability Partnership (LLP) Structure though was introduced by the Government of India with effect from April 01, 2009, i.e. just 3 years back; it has gained immense popularity amongst various types of Business Groups. In the issue of this month, we aim to throw a light on various aspects of LLPs which are being preferred by the Business Houses; be it Partnership, Private Company, Unlisted Public Company, Venture Capital Funds, Real Estate Investors, all small and medium business enterprises (SMEs) and even the Promoters of the Listed Companies.
We briefly deal with why LLP is going to be the structure of the future and why the number of LLPs will grow at an exponential rate. Some of the important ones are stated below –
- Unlike Partnership, LLP has a limited liability and results into protection of personal assets of the partners
- Partners are not agents of other partners; therefore they will not be liable for the acts of other partners
- LLP is a Body Corporate and a legal entity with perpetual succession
- No maximum limit on number of partners; therefore suitable to PE/VC Funds
- LLP is a flexible structure; the partners of an LLP have the freedom to run and manage the LLP as per their will in accordance with the terms defined in the LLP Agreement
- Flexible capital structure allows increase/decrease/reduction in the capital many times not requiring compliances or payment of fees
- No mandatory Audit requirement where the Annual turnover is less than or equal to Rs. 40 lakhs and the contribution of the partners is less than or equal to Rs. 25 lakhs
- Merger/Amalgamation of LLPs is possible which is similar to companies but which is an exclusive feature over LLP
- FDI in LLPs is allowed with effect from May 11, 2011; therefore now a foreign individual or a company can be introduced as a partner in the LLP
- Multidisciplinary LLPs are allowed, so professionals of varied disciplines can work together which is an exclusive advantage of LLP
- LLP has minimum compliances and minimum government intervention as compared with similar business structured as Company or Trust
- LLPs is comparatively tax efficient with no Surcharge, DDT and Restricted applicability of Minimum Alternative Tax (MAT)
We now discuss below how LLP is useful to various Business and Professional Groups –
Small and Medium Enterprises (SMEs)
In the current scenario, the maximum of the SMEs is registered either in the form of Partnerships and balance in the form of Private Companies. However, both these structures have certain inherent disadvantages by way of which they do not make commercially, practically, administratively viable structures for SMEs. Partnerships, for example, have the main disadvantage of an unlimited liability; the liability can extend to even personal assets of the partners. Further, the partners are agents of other partners; therefore they are jointly and severally liable for the acts of other partners. Similarly, Private Companies involve a lot of compliances and government intervention. They need to hold meetings, maintain minutes, statutory records and registers. However, since SMEs are small enterprises these compliances unnecessary increases their hassles and administration cost.
There can be various reasons for SMES to form LLP as mentioned above, but single most important reason in our view is Limited Liability even if all the partners /stakeholders/shareholders are family members.
Real Estate and Construction Business
The Real Estate and construction business involves undertaking multiple projects with multiple entities. LLP is an ideal structure for such businesses wherein different LLPs can be formed for different projects and the LLP can be dissolved/merged or surplus funds remaining post selling of project can be withdrawn in tax efficient manners to be pumped into a new venture without many hassles. Further, each LLP and each project/JV partner can have its own terms and conditions which would avoid conflict of interest in case if multiple projects are handled and liability of one project does not bring down other projects or have any adverse financial impact on other projects. Thus the most important reason for Real estate business is to keep a safe distance between various projects carried by a real estate developer.
Professionals
Expanding competition and entry of international professional firms into India makes it difficult for small homegrown professional firms to survive and grow. One most important legal hurdle for consolidation of such firms is an unlimited liability and other was restrictions in terms of a number of partners. LLP solves both the above hurdles to consolidate and become large firm which can efficiently compete with international firms. Further as discussed below, government and various professional bodies are also taking steps to remove hurdles under their respective laws as discussed below.
Conversion of CA Firms into LLPs
In terms of Council decision dated 14th July 2011, guidelines for Conversion of CA firms into LLPs and constitution of separate LLPs by the practicing Chartered Accountants have been finalized. Therefore now existing CA firms may convert themselves into LLPs and the other members in practice can form new LLPs. This new amendment will pave the way for a consolidation of so many small CA firms, help them to grow exponentially and expand in scale and operations and have savings in cost by way of infrastructure. Further, they can also have a corporate image and limited liability.
Multidisciplinary LLPs
Both the Houses of Parliament, i.e., Rajya Sabha (on December 12, 2011) and Lok Sabha (on December 19, 2011) have passed Chartered Accountants (Amendment) Bill, 2010, Company Secretaries (Amendment) Bill, 2010 and Cost and Works Accountants (Amendment) Bill, 2010 which are awaiting assent of the Hon’ble President of India. It will enable members of the CA/CWA/CS Institute to form LLPs and multidisciplinary partnerships subject to notification of the relevant provisions, after the assent of the President of India and issue of guidelines for multidisciplinary partnerships by the respective Councils.
Accordingly, the definition of Firm, Partner, Partnership, have been modified in each of these Bills to include the Limited Liability Partnerships suitably.The Bills will enable the members of ICAI, ICSI, and ICWAI to form LLPs and work together under one roof. This will pave the way for a consolidation of so many professional firms, help them to grow exponentially and expand in scale and operations and have savings in cost by way of infrastructure. This would also enable them to have a global presence very quickly and offer services of varied disciplines under one roof. Thus the country would achieve a leadership position in the services sector.
Venture Capital (VC) Funds
Prior to the introduction of the LLP Act, VC Funds were established either in a form of trust or a company. When a VC Fund operates in the form of a company, it has to undertake a lot of compliances and involves government intervention. Though the company form gives a corporate image, there is minimum administrative flexibility. Further, a unique feature of a VC Fund is that it pools money from various investors; therefore the restriction of 50 in case of a Private Company may act as a hindrance to the VC Funds with a large number of investors.
In a case of trusts, the trustees are responsible for the Management of the trust, however, the benefits arising from the business of the trust passes on to the beneficiaries. Further, the trustees may not be able to act beyond the scope defined in the Trust Deed.
In comparison to the above, LLP is a business structure which minimizes legal compliances which the SEBI regulated VC Funds need to comply. It provides operational flexibility by way of its inherent nature of being carried on in accordance with the terms defined in the LLP Agreement. Further, there are no restrictions to decide the terms; partners may define the terms according to their requirements. It also provides financial flexibility to the partners by way of easy introduction and withdrawal by partners. It is tax efficient; the share of profit received from the LLPs is exempt in the hands of partners. No restriction on the number of partners makes it suitable for a business like VC Fund. Single most critical factor which will enable VC to grow will be investors becoming direct partners in the projects if VC fund is managed as LLP
Conversion of Private Company/Unlisted Public Company into LLP
As stated above, a company structure involves a lot of compliances and has government intervention. It needs to hold meetings, maintain minutes, statutory registers, etc. Further, the introduction of capital involves cost and withdrawal of capital are difficult.
In contrast to this LLP has fewer compliances and minimum Government Intervention. Further, the partners can introduce and withdraw the capital anytime.
LLP is a tax efficient structure with restricted applicability of MAT and no applicability of surcharge and DDT.
In view of the above, it is beneficial to convert a company into LLP. Such conversion is also beneficial in particular to the investment companies; though at present for the Conversion they need to seek permission from RBI, however, LLP being a tax efficient structure is favorable to these companies. Further, on conversion, there may not be any tax liability subject to satisfaction of certain conditions and detailed examination and expert opinion on direct tax consequences.
Promoters of Listed Companies
Often browsing through the Promoter Holdings of various listed companies, we see a maximum of the Holdings held through a clutch of Private/Unlisted Public Companies. Many times this clutch constitutes even 70-80% of the total Promoter Holding. Ever thought of a structure which could be better and more tax efficient than this clutch!! The answer by most of the people including the professionals might be no.
LLP is a unique structure which is tax efficient for the Promoter Holdings. It would lead to more disposable income and cash inflow in the hands of Promoters. This is the reason why Promoters of various Listed Companies have converted their Holdings into LLPs to save tax and smoothen the succession planning. Here another unique point to note is that even conversion/transfer of Holdings to LLPs may not attract tax; if the Conversion/Transfer is structured with a careful thought and detailed study of the taxability under various circumstances.
Conversion of Partnership into LLP
As stated above, most of the SMEs are registered as Partnerships. Therefore the points with respect to partnerships discussed in the SMEs section in point A would squarely apply here.
LLP has a limited liability and has a corporate image. Further, the partners are not agents of other partners; therefore the partners are not liable for the acts of other partners except in a case of fraud. There is no restriction to the number of partners as in a case of Partnership Firm which can have a maximum of only 20 partners. With the advent of the LLP Structure forming or maintaining a Partnership, a structure does not make a commercial sense. Further, there is no tax liability on Conversion of a Partnership Firm into LLP. Therefore, in the coming years, we would be able to see more LLPs than partnerships.
Merger/Amalgamation of LLPs
Merger/Amalgamation of LLPs involves the process which is similar to the provisions of Section 391-394 of the Companies Act in respect of Merger of Companies. Section 62 of the LLP Act also provides for Demerger of LLPs. It is also possible to merge an LLP into a Private Company. However, special care should be taken for the valuation in case of Merger of LLPs, Taxation aspect on a transfer of Assets, Change in Profit Sharing Ratio, Valuation of Intangible Property and the like.
Conclusion
Looking at the intense benefits LLPs provide to varied types of Business Groups and Sectors; like limited liability, minimum compliances, easy entry and exit to the partners, tax efficiency and the like; it appears that in a span of 5-7 years, more LLPs will be formed than partnership and companies took together every day.
Graph below shows likely impact on formation of new business entities –
LLP would act like a boon to the professionals like CAs, CSs, CWAs and lawyers who would be able to form multidisciplinary LLPs and provide single-window services under one roof. SMEs and Partnerships who do not prefer Company structure due to its compliances may shift to LLPs and do away with unlimited liability. More foreign investment is expected to come in the country through FDI and PE/VCs.
Our Service Offerings
[su_tabs color=”#84ADEA”]
[su_tab title=”Mergers and Acquisitions”]
Mergers and acquisitions have become an essential and integral part of corporate strategy and will gain more significance as competition intensifies and companies move up the growth curve. In fact, M&A should grow in magnitude across the scale regardless of type and size of corporate from the blue chips to S&M companies…… Know More.
To discuss how our team can help your business achieve true results, please Contact us
[/su_tab]
[su_tab title=”Divestment Advisory Services”]
Family-owned companies often divest for various reasons including next generation not interested in carrying on the said business or to fund retirement etc. Carving out a business is often more complex than acquiring one and selling a carve-out business requires a greater level of planning, effort, and resources. HU Consultancy has extensive experience…… Know More.
To discuss how our team can help your business achieve true results, please Contact us
[/su_tab]
[su_tab title=”Joint Ventures”]
Joint Venture is a right option for inorganic growth when both the parties to the transaction have unique strength and want to come together to leverage the strength of each other without affecting their present structure or ownership. With the advent of globalization and increasing business opportunities,…… Know More.
To discuss how our team can help your business achieve true results, please Contact us
[/su_tab]
[su_tab title=”Financial Re-engineering”]
Financial re-engineering involves the radical redesign of core business processes to achieve dramatic improvements in return on investments. The company, may, in the long run, have some assets which are surplus or not being utilised by the core business. The effective utilisation of those assets / funds can increase value for stakeholders substantially. HU Consultancy offers financial re-engineering and debt restructuring …… Know More.
To discuss how our team can help your business achieve true results, please Contact us
[/su_tab]
[/su_tabs]
